Soitec SA (SOI) Earnings Call Transcript & Summary

Welcome to Soitec First Quarter Sales Presentation for Fiscal Year 2027. Today's conference will be hosted by Laurent Remont, Chief Executive Officer; and Albin Jacquemont, Chief Financial Officer. [Operator Instructions] Now I will hand the conference over to Laurent Remont to begin today's conference. Please go ahead.

Hello, everyone, and thank you for joining us today for Soitec's First Quarter 2027 Sales Conference Call. I'm Laurent Remont, CEO of Soitec. With me on the call today, Albin Jacquemont, our CFO; and Alex Petovari, Head of Investor Relations, Financing and Treasury. Before turning to the quarter, let me briefly explain why we decided to bring forward to this publication. Since the start of the second quarter, customer demand for Photonics-SOI has accelerated faster than expected. At the same time, the action plan I set out to increase our Photonics-SOI production output has started to deliver positive results. These developments gave us materially greater visibility on the pace of our Photonics-SOI ramp-up. Consistent with our commitment of transparency, rigor and timely communication, we choose to update you ahead of schedule. With that, let me turn to the 3 key takeaways from the first quarter. First, we delivered a stronger-than-expected start of the financial year. Revenue reached EUR 113 million, up 23% year-on-year at constant currency and scope, well above our guidance of around 15%. This performance was primarily driven by the continued acceleration of AI-related activities with Photonic SOI sales doubling year-on-year. Second, the momentum on Photonics-SOI is accelerating. Photonics-SOI demand remains supported by growing need for high-speed, high-bandwidth optical connectivity in data center infrastructure. Our medium-term visibility in Photonics-SOI is also improving through multiyear commitment from a growing number of customers. These commitments extend beyond fiscal year '27. The group remains focused on scaling its Photonics-SOI production capacity to support accelerating demand. During the quarter, we achieved an important industrial milestone with the qualification of our Singapore 300-millimeter SOI fab for high-volume manufacturing of Photonics-SOI with first customers. Finally, we continue to execute with discipline and remain committed to strategic direction we set out in May. we are tracking to the plan we set out with the company position on a cash generation path. Revenue is now back to growth, paving the way for improved profitability. With that introduction, let me hand over to Albin, who will take you through the quarter in more details.

Thank you, Laurent. Good morning, everyone, and thank you for joining us on short notice. Laurent and I greatly appreciate your time and your participation today. Let me now walk you through our first quarter performance, starting out with Mobile Communications. Mobile Communications generated EUR 39 million in revenue during the quarter, down 10% year-over-year on a constant currency and scope basis. Against the backdrop of a still challenging smartphone market, POI adoption continued to gain momentum, while RF-SOI customers made further progress in reducing inventory levels. RF-SOI revenues were broadly stable year-over-year as higher 300-millimeter revenues offset lower 200-millimeter revenues. POI revenues were also broadly flat as higher volumes from continued technology adoption were offset by lower pricing. POI's position as a core substrate for next-generation filter edge architectures was further reinforced by the long-term agreement recently entered into with Skyworks, which gives the group greater medium-term visibility. FD-SOI revenues were lower year-over-year, mainly reflecting volume effects in the subdued mobile markets. Turning now to Edge and Cloud AI. Revenues reached EUR 65 million in the quarter, up 47% year-over-year on a constant currency and scope basis. This strong performance was primarily driven by Photonics-SOI, where revenues doubled year-over-year. Demand continues to be supported by the growing need for high-speed, high-bandwidth optical connectivity across AI data center infrastructure, including pluggable transceivers, near package optics and co-package optics architectures. In addition to another strong quarter, we continue to strengthen our medium-term visibility through multiyear customer commitments and associated cash deposits with these commitments now extending beyond fiscal year 2027. This momentum continued into the second quarter, reinforcing our confidence in the pace of a ramp-up and our medium-term growth trajectory. As Laurent noted previously, during the first quarter, we qualified our Singapore facility with the first customers for 300-millimeter Photonics-SOI production. This is an important milestone that gives us confidence in the ramp-up trajectory as we continue to advance additional customer qualifications. FD-SOI revenues in Edge and Cloud AI also grew year-over-year, benefiting from a modestly favorable price/mix contribution. Let me now turn to Edge -- to Automotive and Industrial. Revenue reached EUR 10 million in the quarter, representing 108% year-over-year growth on a constant currency and constant scope basis, albeit off a low comparison base. Activity remained subdued as some customers continue to work through elevated inventory levels. Nevertheless, we continue to benefit from strong visibility into 2028, underpinned by a long-term agreement with a key customer. Power SOI revenue grew year-over-year, driven by higher 200-millimeter volumes, complemented by the initial contribution from 300-millimeter products. Automotive FD-SOI wafer revenues also increased year-on-year, supported by larger volumes. The technology continued to gain traction in applications such as automotive radar, microcontrollers and other analog and mixed signal systems. With that, let me hand back to Laurent for the outlook.

Thank you, Albin. So before opening the line for your questions, let me turn to our outlook indeed. Soitec expects Q2 '27 revenue to be up more than 30% year-on-year, notably sustained by acceleration in Photonics-SOI. Looking ahead, the momentum behind Photonics-SOI keeps building as AI architecture progressively adopt optical transceivers. Photonics-SOI technology has already demonstrated its ability to address different configuration such as pluggable transceiver, near package optics or NPO and co-package optics CPU. As the industry is entering the scale-up era with mass production of AI interconnects, our visibility on Photonics-SOI and demand and our ability to execute are both improving. Assuming no material disruption in the AI market, SOI fiscal year '27 revenue is expected to more than double the revenue generated in fiscal year '26, which was slightly above $100 million. For fiscal year '27, we expect contrasting dynamics across our end markets. In Mobile Communications, progress in TOI should be offset by the ongoing customer inventory correction in RFSOI in a challenging smartphone market. In automotive, the good visibility stemming from customer long-term agreement means that any early sign of end market recovery would not be expected to benefit the group this year. By contrast, edge and cloud AI momentum continues to improve, driven by accelerating demand for Photonics-SOI. From an investment standpoint, we are addressing this growing demand for photonic SOIs with agility as we leverage the fungibility of our industrial footprint. As a result, fiscal year '27 CapEx cash out is still expected around EUR 100 million. Our priorities remain unchanged. We will continue to capture the opportunities created by AI while maintaining disciplined financial execution and selective investment approach. The acceleration we are seeing in Photonics-SOI reinforce our conviction that AI will remain a powerful growth driver for Soitec. Combined with the quality of our technology portfolio, our expanding industrial capabilities and improving customer visibility, we believe the group is well positioned to capture this opportunity while continuing to execute with discipline. Thank you very much for joining us today, and we are now happy to take your questions.

[Operator Instructions] The next question comes from Emmanuel Matot from ODDO BHF.

Thank you for all the positive news on Photonics. What is your outlook for this key product line beyond this year, given the long-term agreements in place with your customers? Should we expect further strong growth over the coming years? Or will we see things level off? Second, what is the current status of the co-package optics qualification phase when it is due to be completed? And third, how will the increase in demand for Photonics affect your margin this year? The consensus forecast was for an EBITDA margin of 27% this year prior to last night's announcement. You should be comfortable with this estimate.

Thank you, Emmanuel. I will take the 2 first one, and Alban will reply on the margin. So outlook beyond fiscal year '27 for Photonics. Too early for us to comment. As we said, we see a good momentum accelerating. We have negotiated with most of our customers capacity reservation agreements that extend beyond fiscal year '27. However, that's a very dynamic market. So we are cautious, and we will communicate on that once we have more certainty and more visibility. Regarding your second point on co-package optic -- so most of the revenue we see right now and most of our revenue for fiscal year '27 will be on pluggable and partly MPO as well probably starting. We still see co-package optic ramping up at the end of the year on the scale-out. So especially on the racks, the switching racks for the scale-out. However, that's not the main driver of revenue right now. We expect medium term to be -- to have [indiscernible] optic as a growth driver as we see 3 waves of growth in photonics. So there was the first wave I remind you, we are in Photonics for 10 years. So first wave was more telecom driven. There is right now the scale-out in the data center. And there will be the scale-up starting already. Scale-up is starting actually already with pluggable and will move forward with co-package optics. And for all of that, we can address with pluggable, NPO and co-packaged optics. With that, I hand over to Alba regarding your margin question.

Yes, Emmanuel. Look, obviously, the gross margin will be impacted by a few drivers this year. So I would like to walk you through these key factors. First, obviously, we will benefit from a powerful mix effect driven by the continued increase in Photonics sales. The contribution of Photonics product is well above the average at the group. So the mix impact will be powerful. Second, we will see a substantial fab reloading as we progress throughout the year at around 65% on average for the year compared with the approximately 60% level we indicated in May. Be aware this reloading impact did not materialize in Q1. It will ramp up in Q2, Q3, Q4. These positive factors, the powerful positive factors will be offset to some extent by some elements. First, fundings embedded in the gross margin will be significantly lower compared to the prior year. To put things into perspective, we expect approximately EUR 30 million less funding embedded in the gross margin compared to the prior year because the IPCEI 2 is ending at the end of the year. And we don't know when the IPCEI 3 will kick in. Second, price impact will still be negative as a consequence of POI ramping up and the company entering into long-term agreements, which gives it visibility. Third, we should see higher profit sharing and share-based compensation items compared to the previous year. And last, the dollar hedge is at 1.19 compared with an execution rate of 1.14 last year. Now stepping back, I would remind you that we have consistently said that our recovery would be phased. The first phase was cash. We delivered on that commitment in Q4 2026 and the actions taken by our teams are expected to translate into a substantial improvement in cash generation in the first half of the year. The second phase is a return to growth. The confidence we have expressed in our ability to return to growth is now beginning to translate into tangible results at the call of today. And the third phase is a return to a satisfactory level of profitability driven by gross margin, and we expect that recovery to be tangible and significant in 2027 and to fully materialize in 2028.

The next question comes from Aleksander Peterc from Bernstein.

So I'd just like to understand what exactly triggered the massive Photonics outlook upgrade. I think you previously indicated more than 30% CAGR. So obviously, 100% is more than 30%, but this is a step change here. Is it simply qualifying the Singapore line allowing for this surge this year? And how should we think about growth continuing from here? Can you add more capacity quickly given the strong demand patterns you see? Secondly, I think you indicated with full year results that growth would not necessarily accelerate from the first quarter. We now get an acceleration already in Q1 and reaccelerating again in Q2. So should we think about the rest of the year as reflecting normal seasonal patterns rather than softer seasonal patterns, which you seem to indicate previously?

Good. So maybe on your first part, so what has changed is 3 things, I would say. First, we continue to see an acceleration in the demand since May. So the demand from our customers continue to grow. That's the first point. Second point is we are more capable with the action we set in place, and I will come back to that in a second, but we are more capable to qualify this demand to judge and understand if they are double booking, if they -- how committed are our customers on this demand. So that's as well this increase our confidence. Third is our capability to execute. So really one of the first actions I took when I took the job was to set in the very few first weeks a steering group around Photonic to really mobilize the full company on this topic across the various organization, operation, business line, sales, finance. So this delivered results and increase our confidence to reply to this demand and execute. So meaning, for example, ensuring we have all the supply that is needed on our side on material from our supplier, meaning we are adjusting our industrial footprint and the tools that we need to adjust to the new product mix, meaning that we are signing this capacity reservation agreement with customers to qualify the demand to have as well the capability to judge this demand and be sure they are committed. And as well, as you said, we made very good progress in the qualification of our Singapore site with first customers starting production already. So all of that explains the change in our tone between May and now. Regarding the second part of your question on seasonality. So we are not guiding per quarter. So what we wish to do is to give you a better view on what is ongoing and that you can calibrate as well versus what you see yourself in the industry, but we are not guiding by quarter. As we told you in May, we are trying to reduce our seasonality. But yes, given the acceleration in Photonics, it will be difficult to do this year, but that's for the best, I would say.

Okay. Just to clarify, so the Singapore line was initially, I think, was due to come on stream by the calendar year-end. So this is a meaningful acceleration in the readiness of that plant. Is that correct?

Yes. So we were sampling. So we had first to sample, then we have our customers to qualify these new products. And so this accelerated. And yes, indeed, this was planned initially more end of the calendar year, and we accelerated that with first customers. Then all the rest of the customers, they still have to qualify as well this line because we pushed all our customers if they want to increase their capacity to qualify both our Berner production site in France and our Singapore site. So that's ongoing for some of them. That's done for all that.

The next question comes from Nigel van Putten from Morgan Stanley.

Can I start with a clarification question just to get a better bearing on sort of the quarterly development in Photonics. Can you sort of confirm that it was not only up year-on-year or doubling year-on-year, but also up quite a bit from the first quarter from the fourth quarter last year? And then if I look at the guide for the second quarter, obviously, that's also to Photonics. Can you then should we then expect another material sequential increase in Photonics SOI as well? I think it's in the press just confirming this because actually, maybe my real question is, given the commentary so far, I think there's more customers coming online. So should we see there is a limitation of what you can currently produce per quarter? Or will that continue to progress into the second half of the year as well? And that's my first question. I'll leave it there.

Yes. So I confirm that there was an increase between -- in Photonics between Q4 and Q1, and we expect that to continue through the year. We are exploiting the fungibility that we have between all the SOI products, and we are exploiting as well some empty space room. And so we are tuning our manufacturing to reply to the demand. So yes, you should expect this will continue to grow. Not -- as I said in May, this is more for us to catch up quickly with the demand. So it's more a lead time topic than a bottleneck topic. Would this momentum continue even to accelerate big time, as we said a quarter ago, we have capabilities as well to expand further either in Singapore or we have a building that will need to be equipped at some point. So that's a big decision on us, and we are not at this stage at all right now, but this is something we could trigger and we are starting as well to expand in our before module in Bernin for Photonics. So yes, we are set up to continue to grow.

Perhaps just given time lines are moving around, the Bernin 4 expansion, when should we expect customers to start qualification out of there? Or maybe even better yet, when would they expect -- when would you expect to start shipping from there? And then maybe related to that, you're making multiyear commitments or getting those from customers. How should we think about pricing for Photonics given that your customers are committing for multiple years at the same time, there does seem to be some urgency. So how is the pricing environment currently?

So regarding B4, the good thing is D4 is a module that is connected to D2, meaning qualification of our customer, we should be able to do it usually in that case by similarity. So that's not a big qualification time for our customer. So for us, it's more equipping D4. So we are starting to move in that direction. But you should not expect this not before '28. Regarding ASP, I'll let you comment maybe Albin.

No, we expect pricing, obviously, to remain strong all the more given even so with the high volumes that we are contemplating. So we express a message of confidence in pricing.

The next question comes from Jakob Bluestone from BNP Paribas.

I've got 2 questions, please. Firstly, on capacity utilization, I think you said you expect an average fab loading of 65% for the year. Could you maybe give us the Q1 number? And then secondly, on the Photonics side, I don't know how easy it is, but is there any way to sort of give any color on the sort of mix of the revenue or the orders you're seeing? How much is MTO CPO versus scale across?

Maybe you take the 65%. And the reason I did mention the number was that back at the end of May, I said 60%. So overall capacity utilization will be higher. It's not always easy to determine the numbers because it depends a lot of -- in the mix of the product that you manufacture in the factory because time utilization of the equipment is very different depending on the product. Nevertheless, 65% plus. And then your -- on the first quarter, our average loading was 48%. And noticeably, that's down from 74% in the first quarter of last year. which gives you an idea of the magnitude of the efforts which was carried out by the teams to reduce inventories and drive working capital back at the right level. And with this number, you can infer what our loading should be over the next 3 quarters. So you see that the ramp-up will be very significant.

Now on the second part of your question regarding defined configuration and what part of our business is related to pluggables, CPO, NPU and so on. So first thing, the way a disclaimer. For us, that's not always straightforward to identify where our wafers end up? Is it a CPO?s it a pluggable or an NPO. We have a good idea, but that's not always certain. However, our view currently is most of the business we do today is -- and the growth is coming from scale-out, mostly pluggable at this stage, starting -- so we expect NPU to take some share. And we expect CPO in the scale-out as well to ramp up end of the year. Regarding the scale-up, Again, that's mostly pluggable. We expect here, there is a question mark on when CPO will really kick in for the scale-up. You know that one of the challenge of the CPO is more on the assembly side and as well on the testing to be sure to reach good yield on the overall assembly. So depending how these things progress, NPO could be an intermediate step or NPO could develop in parallel while CPO will mature as well. For us, we do not see a big difference if this is NPO, pluggable or CPO there is roughly the same photonic solution in all the systems, and we are working with all the customers that are serving these various architectures. So bottom line for us, all of them pluggable NPO and CPO are great opportunities for us.

The next question comes from Craig Mcdowell from JPMorgan.

Just 2 for me. The first one, I realize that the agreements that you strike with customers will be different. But maybe you could just give us a flavor of the terms that you're trying to agree with customers on Photonics and what kind of terms you're looking for from your customers? The second one was on RF-SOI. Can you maybe give us an update on the inventory digestion? What are you -- what's the current inventory in the channel? And any change to your expectations on the digestion through the year?

So customer capacity reservation agreement on customers. So we have a good momentum. Obviously, we are not forcing all our customers to sign capacity reservation agreement. If they want to stay on a more transactional short-term view that's fine for us. And that's the purpose as well for the capacity reservation agreement is to judge a bit the demand and the level of commitment the various customers. Usually, what we are asking in this customer reservation agreement is we agree on a price, we ask for a down payment or a deposit and we ask a visibility on the customer inventory to be sure that we are not building inventory down in our value chain. Regarding RF-SOI inventory, so if you recall what we said in Q4 due to seasonality, inventory was flat, but we were expecting inventory to go down again through the year, which materialized. So in March, we were at 2 million roughly 8-inch equivalent -- 2 million wafer 8-inch equivalent in March. Now we are estimating we are at 1.7 million wafer equivalent 8-inch. So that's in line with what we said previously. Bear in mind that we estimate the sellout for a year at about 1.5 million wafer equivalent 8-inch per year, so which means we still have some way to go to come back to a pre-COVID level. So we will continue to have action to reduce this inventory.

The next question comes from Oliver Wong from Bank of America.

On the strong Photonics results. So I understand that Photonics SOI revenue grew sequentially from Q4 to Q1 and is expected to into Q2. Would you say at this point, you're seeing sequential growth throughout the rest of this fiscal year? And then I'm curious, is this sort of revenue timing more driven by capacity or by just sort of the availability of your capacity or by just customer timing? And is there scope for demand to further increase significantly even for this year?